China, Europe and beyond: emerging trends and looming challenges
Regarded as one of the core financial services leadership bases within the global RSM network, RSM Cayman offers a range of audit, tax and consulting services to the fund management industry in the Cayman Islands.
Originally established in 2003 RSM Cayman , the firm – which forms part of the global RSM network of independent accounting firms, the 6th largest globally – is at the forefront of Cayman’s continually evolving investment management industry.
With Cayman very much the jurisdiction-of-choice for the international offshore hedge fund industry, the firm specialises in providing services to all forms of structures for a global client base.
In a wide-ranging interview, Alex Bodden, Managing Partner at RSM Cayman, explores the key emerging trends in the domicile – from the growing business opportunities offered by the burgeoning Chinese fund management industry to the looming challenges posed by sweeping global regulatory reforms.
How important is Cayman in the context of the global hedge fund industry? Where are you seeing new growth in your business?
“Cayman certainly acts as an industry hub, and at RSM we work both within that industry hub and as a hub within RSM as far as the services that we provide to our clients. Typically, the managers for our clients are located elsewhere in the world across all the major jurisdictions, and the fund administrators are also located both here and elsewhere in the world.
“Our clients range in size – from small million-dollar NAV managers to multi-billion dollar NAVs – and they’re also spread across all types of structures, investment strategies, and asset classes.
“Geographically it’s global, but a significant proportion of our work is US-based or US-generated. But we have clients in London, in Hong Kong, Singapore, Australia, New Zealand, India, South Africa, South America, and Canada. We have a global reach in terms of our clients’ footprint and location.
“Obviously, there is a heavier concentration in the main asset management jurisdictions: the US, the UK, Hong Kong and Singapore, but we are also starting to get more and more inquiries from China – either directly from China itself or through our Hong Kong and Singapore offices. Cayman has definitely seen its fair share of opportunities coming out of China in terms of fund structures.”
What’s driving that inquiry?
“A number of factors. There’s a gradual, growing sophistication in the Chinese investment industry and a general acknowledgment of the benefits of offshore vehicles to access investor pipelines. They are definitely becoming more sophisticated and catching up with the rest of the industry and adopting the products that are already used around the world.
“At RSM we’ve got a very good firm with deep capability in China, supported by a very good RSM presence in Hong Kong and Singapore, with large China desks and operations from those two jurisdictions into mainland China. We’re seeing very much an increased level of activity and inquiries across both open- and closed-ended funds to access capital for investments in China, be it through hedge funds or PE offerings. I would imagine if you spoke to all the other major firms they would be saying something similar – I think in general the industry is seeing a definite growth in activity from that region and certainly from China.”
While China offers opportunities for Cayman’s fund industry, Europe is arguably presenting some major challenges for the jurisdiction at the moment, specifically on the regulatory side. How has the regulatory environment changed?
“It’s very topical at the moment, but you must step back and look at the history and evolution of the enhanced regulatory environment, and the ever-growing regulatory demands on the industry and in jurisdictions such as Cayman in general over the last few years.
“The whole world is subject to an ever-increasing enhanced regulatory environment, and the hedge fund and alternative investment fund industry and its jurisdictions are certainly not immune from that.
“Every year, over the last several years, there’s been another regulatory initiative or requirement leading to adoption of new legislation, or revision and amendments to existing legislation. That goes back starting off with FATCA, then you had CRS, then there was AML/KYC.
“There were further enhancements on AML and further requirements to appoint the reporting officers. Then you had the Economic Substance Law which was passed in December 2018. All these regulatory environment initiatives have been driven by either the OECD, the EU, and other transnational organisations – some more global in nature than others.
“Offshore jurisdictions continue to be very much the hot topic. Last year Cayman went through a further legislation development process, driven mainly by discussions with the EU and a consultation process with the main industry participants – accountants, attorneys, administrators, independent directors, AIMA – to address what was deemed necessary in terms of enhanced fund regulation in order to meet latest EU requirements. One upshot was that the existing mutual funds regulation has been revised in February 2020.
“Now essentially all hedge funds registered here in Cayman have to be also registered with the Cayman Islands Monetary Authority (CIMA) as opposed to just being registered with the Government registrar. This is intended to provide CIMA with a much more robust regulatory oversight function.
“There’s also a completely new private funds law which addresses the closed-end funds. The final legislation, also passed in February 2020, will bring all closed-ended funds under CIMA regulation with no exceptions for any form of designated private funds – that’s a significant step-change for the regulatory environment of the fund industry in Cayman. It introduces some AIFMD style elements to the regime as far as regulatory matters are concerned.
“Cayman tries to ensure that it keeps up-to-date, and even ahead, of the curve of regulatory demands, where appropriate, for the industry that Cayman operates in. It has very much been an ongoing process to ensure Cayman is compliant with global requirements and initiatives, and this will continue to be the case
What about the EU blacklist plan specifically? What is the potential impact on the hedge fund industry in Cayman?
“Short-term, it is certainly bad optics, but I think medium-to-longer term, our regulatory environment will continue to lead the way compared to offshore jurisdictions. It’s definitely a slap on the wrist for Cayman with short term negativity towards Cayman certainly in Europe; medium-to-longer term, there’s going to be no significant negative effect. There may be additional requirements expected, but we will eventually come off the blacklist as the currently required legislation is all in place – it’s just a matter of how long that may take, hopefully later in 2020. No one likes more regulation, but that’s the world we live in and it’s not going away. We’ll only ever get more.”
With that in mind, what are the long-term prospects for the industry here?
“Cayman long-term will remain competitive and I believe will continue to see growth. When you look back to the major changes made to mutual funds laws back in the early 2000s, despite initial concerns that proved to be a real positive for Cayman as a jurisdiction of choice.
“The strength of Cayman is that we have the resilience and depth of experience and expertise across all service provider types – in the accountancy profession, in the legal profession, the administration profession, the corporate governance profession. Think about the corporate governance industry – it didn’t exist 15 years ago; now it’s a critical part of the service offering in the offshore funds industry.
“Some clients may review their operations, to determine whether these structures are appropriate for what they’re trying to do, and if they need to adjust, or open up parallel structures such as UCITS in Europe. There may be changes or reviews of where some managers have their operations or corporate domicile. But this should form part of the regular governance reviews that fund operators should make anyway. Cayman has always been adaptable and Cayman fund structures themselves are very flexible.
“But as with any regulatory initiative or other new initiative, the cost of doing business is going to go up because of enhanced regulation. It’s worldwide, and Cayman is certainly at the centre of that. You can’t avoid it.
“Cayman and the industry itself will continue to be very strong and resilient and ultimately the offshore jurisdiction of choice. There’ll be changes, inevitably, because nothing stands still, but Cayman has proven in the past and will continue to prove that it takes the necessary steps to adapt to changes in the industry and be successful.”
Alex Bodden, Managing Partner, RSM
Alex Bodden is an Assurance Partner and the Managing Partner of the Grand Cayman office of RSM. He has over 25 years of experience in the audit and finance sector markets in the UK, US and the Cayman Islands. Alex has a particular focus in the Asset Management industry with specialism in the Hedge Fund and Private Equity sectors.